Risks and uncertainties are part of life’s great adventure — accident, illness, theft, natural disaster – they’re all built into the working of the Universe, waiting to happen, this where life insurance comes into picture.
What is life insurance?
Life Insurance is an agreement that guarantees payment of a stated amount of monetary benefits at the end of a specified term or on the death of the life insured. Life Insurance provides for financial security in the event of death or on the inability to earn due to physical disabilities. Taking out life insurance responsibly can help you live the life you want to and protect your family after you’re gone. Without life insurance many people would be left destitute in the event of an unexpected disaster. Besides providing for financial security in the case of one’s untimely death, it can be used to accumulate a kitty for your old age, systematically build assets, for funding your child’s education and also for saving on taxes.
Let us study the roles of life insurance in detail:
Role 1: Life insurance as an “investment”
Insurance is an attractive option for investment. While most people recognize the risk hedging and tax saving potential of insurance, many are not aware of its advantages as an investment option as well. Insurance products yield more compared to regular investment options, and this is besides the added incentives (read bonuses) offered by insurers.
In life insurance, unlike non-life products, you get maturity benefits on survival at the end of the term. In other words, if you take a life insurance policy for 20 years and survive the term, the amount invested as premium in the policy will come back to you with added returns. In the unfortunate event of death within the tenure of the policy, the family of the deceased will receive the sum assured.
Now, let us compare insurance as an investment options. If you invest Rs 10,000 in PPF, your money grows to Rs 10,950 at 9.5 per cent interest over a year. But in this case, the access to your funds will be limited. One can withdraw 50 per cent of the initial deposit only after 4 years.
The same amount of Rs 10,000 can give you an insurance cover of up to approximately Rs 5-12 lakh (depending upon the plan, age and medical condition of the life insured, etc) and this amount can become immediately available to the nominee of the policyholder on death. Thus insurance is a unique investment avenue that delivers sound returns in addition to protection.
Role 2: Life insurance as a “risk cover”
First and foremost, insurance is about risk cover and protection – financial protection, to be more precise – to help outlast life’s unpredictable losses. Designed to safeguard against losses suffered on account of any unforeseen event, insurance provides you with that unique sense of security that no other form of investment provides. By buying life insurance, you buy peace of mind and are prepared to face any financial demand that would hit the family in case of an untimely demise.
To provide such protection, insurance firms collect contributions from many people who face the same risk. A loss claim is paid out of the total premium collected by the insurance companies, who act as trustees to the monies.
Insurance also provides a safeguard in the case of accidents or a drop in income after retirement. An accident or disability can be devastating, and an insurance policy can lend timely support to the family in such times. It also comes as a great help when you retire, in case no untoward incident happens during the term of the policy.
With the entry of private sector players in insurance, you have a wide range of products and services to choose from. Further, many of these can be further customized to fit individual/group specific needs. Considering the amount you have to pay now, it’s worth buying some extra sleep.
Role 3: Life insurance as “tax planning”
Insurance serves as an excellent tax saving mechanism too. The Government of India has offered tax incentives to life insurance products in order to facilitate the flow of funds into productive assets. Under Section 88 of Income Tax Act 1961, an individual is entitled to a rebate of 20 per cent on the annual premium payable on his/her life and life of his/her children or adult children. The rebate is deductible from tax payable by the individual or a Hindu Undivided Family. This rebate is can be availed upto a maximum of Rs 12,000 on payment of yearly premium of Rs 60,000. By paying Rs 60,000 a year, you can buy anything upwards of Rs 10 lakh in sum assured. (Depending upon the age of the insured and term of the policy) This means that you get an Rs 12,000 tax benefit. The rebate is deductible from the tax payable by an individual or a Hindu Undivided Family.
But many people make the mistake of burdening themselves with too many life insurance policies to the detriment of the quality of their lives while they’re alive.
Keep the following in mind when buying life insurance:
- The best insurance for your family is having a roof over their heads that no-one can take from them after you die. Before putting large amounts of money into a policy, pay off your debts and increase your assets.
- Rather than taking out a number of life insurance policies, take out one good one with a reputable company that has a sound track record.
- Make sure you don’t buy too little or too much insurance. As a rule of thumb, your policy should pay out 15 to 30 times your annual income as capital when you die.
- If you are financially dependent on your partner, make sure that there is adequate life insurance to cover your and your children’s needs should your partner no longer be able to generate an income.
- When taking out protection against loss of income, you must be sure that you can maintain the same standard of living as when you were working.
- Protect yourself against debt. People to whom you owe money have first claim to your assets. Make sure there is life insurance to pay off your house, car, etc when you die.
- Your premiums will depend on your age (the younger you are, the less you will pay), your state of health (the healthier you are, the less you will pay) and your lifestyle (if you smoke, you will pay more). Be completely honest with your insurers. Many people have had their claims rejected because they did not tell the broker about their smoking habit or a particular health problem.
- Be specific about naming a beneficiary – the person the money will be paid to after you die. If you do not name a beneficiary, the money will be paid into your estate and it could take months before your family is able to have access to the money.